Ever-growing demand for the iPod and laptop Macs were bright marks for Apple Computer in its 2004 fiscal year, but strong competition and tough economic factors are hurting its educational sales, the company stated in its just-released annual report.

Among the highlights of the report include...

Apple said it sold a total of 4.4 million iPods in the fiscal year, an increase of 370%. Net sales of iPods rose US$961 million or 279% during fiscal 2004 compared to the pervious year. Since introducing the iPod in 2002, Apple said it has sold approximately 5.7 million iPods.

Apple acknowledged competition in the digital media device player is intensifying and that it must continue to improve its iPod product line. Apple said it believes that to maintain a competitive advantage it must "more effectively (integrate) the entire end-to-end music solution." In the personal computer space, Apple said, "an increasing number of Internet devices that are smaller, simpler, and less expensive than traditional personal computers may compete for market share" against its Macintosh line of products, such as cheaper, more powerful home gaming systems.

Unit sales of portable systems accounted for 51% of all Mac systems sold during the fiscal year - a 9% increase over the previous reporting period. Laptops "produced the strongest revenue and unit growth during fiscal 2004 compared to 2003 of approximately 26% and 33%, respectively, the report stated. Apple said the jump was a further sign of an "overall trend in the industry towards portable systems."

While Apple said its education sales experienced a 19% year-over-year growth, it acknowledged the school market remains "challenging" because of funding pressures due to weak economic conditions, large budget deficits in many states, and increased competition from Windows-based PCs. "Although the Company has taken steps, and will continue to take steps, to address weakness in the U.S. education channel, it remains difficult to anticipate when and if this trend will reverse," the report said.

Net sales of Macintosh systems increased 10% during fiscal 2004 compared to 2003 while net sales per Macintosh unit sold remained relatively flat, the company said. Apple acknowledged that while net and unit sales were strong during the fiscal year, iMac sales were flat.

Net sales from Appleis retail stores grew 91% compared to 2003. Much of that increase the company attributed to a jump in the number of retail stores from 65 to 86 at the end of the fiscal year, including a 36% year-over-year increase in average revenue per store.

The report emphasized the importance of spending on research and development to head off strong competition. Confirming it spent $489 million in the fiscal year on R&D, the company said it "may expand the range of its product offerings and intellectual property through licensing and/or acquisition of third-party business and technology." The Mac Observer reported Wednesday that Apple ranked 91st among American businesses in spending on research and development in 2003. Apple spent US$471 million that year on R&D, a 6% increase over 2002.

As of September 25, Apple and its subsidiaries worldwide had 11,695 employees and an additional 1,731 temporary employees and contractors.

Apple said it plans to spend $125 million of its $240 million planned capital expenditures in fiscal 2005 on further expansion of its retail segment. The company said about half of the stores expected to open during its first quarter will be in the new "mini" store design.

Net sales of other music products increased $242 million or 672% during fiscal 2004 compared to 2003. Apple said it experienced strong growth in sales of iPod services and accessories consistent with the increase in overall iPod unit sales for fiscal 2004. The increased sales from the iTunes Music Store, which was originally introduced in April 2003, is primarily due to making the store available for Windows in October?2003 and the introduction of the store in the U.K., France, and Germany in June?2004.

With regard to on-going legal cases, the report acknowledged a lawsuit by Antor Media Corp. against Apple for allegedly infringing on a server transmission patent will go to court in March of next year. The company confirmed there has been no further developments in a number of cases, including eight consumers lawsuits over poor battery life in the Apple iPod, five resellers suing Apple over among many things breach of contract, fraud and trade libel, and various other patent infringement claims Apple is currently investigating.